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NYC Consumer Debt Defense Project

Aggressive debt collection tactics are drawing federal scrutiny

Monday, August 20, 2012

WASHINGTON — Hard economic times have helped push millions of Americans deeply into debt, plunging many into a dark world filled with relentless collection agents, aggressive lawyers and companies that profit mightily if they can get people to pay up.

Aided by outdated laws and lax oversight, debt collection has become a $12-billion-a-year business as people increasingly have fallen behind on their bills for credit cards, student loans, hospital stays and other expenses.

The Great Recession and its aftermath have led to a sharp increase in the number of people facing debt collectors to an estimated 30 million Americans this year — up nearly 50% since 2003.

At the same time, job losses and underwater mortgages have made it more difficult for many of those people, who already are struggling to make ends meet, to pay off their debts.

Federal regulators, along with lawmakers in California and several other states, are starting to take action against debt collection firms over aggressive tactics that authorities said are becoming rampant.

Those tactics include intimidating phone calls, unfounded threats of arrest, harassment of relatives and neighbors and a flood of lawsuits aimed at squeezing money for unpaid bills from paychecks or home equity — recovering $55 billion in debts in 2010.

Southern California is home to two of the debt-collection industry's major players — ones that consumer advocates alleged have been at the forefront of improper behavior.

Encore Capital Group Inc.of San Diego, which buys unpaid bills from businesses, has faced numerous lawsuits filed by state attorneys general and private lawyers, alleging it used false and faulty affidavits, much the way banks allegedly used robo-signing in filing foreclosure documents.

Although some cases are still pending, Encore said it has corrected the problems.

And Brachfeld Law Group in El Segundo, one of the nation's largest debt collection law firms, has been contending with allegations that it failed to investigate the facts adequately when it pursued some debts. A spokesman said the firm checks to ensure accuracy.

In one case, though, Brachfeld allegedly helped pursue the wrong person for a debt he never owed.

Several years ago, debt collectors began pursuing state Sen. Lou Correa (D-Santa Ana) for an unpaid Sears bill they said he owed. He told them they had the wrong man, but the debt collectors never wavered.

"These folks are very aggressive," Correa said. "They'll call back repeatedly and say, 'Tell us some personal information so we can tell it's not you.' When all of a sudden is the burden of proof on me?"

Last year, Correa discovered his Senate paycheck was being garnisheed because of a $4,329 lien for the Sears debt. Brachfeld had obtained a default judgment in court, even though, Correa said, the lawsuit was never served on him and he knew nothing of the claim or the court hearing.

He later learned that the debt belonged to a Luis Correa from Santa Ana. The man had a different Social Security number, different address, even different first name — the senator is legally Jose Luis Correa.

"I always pay my bills on time. Then to have somebody garnish my wages, I thought was pretty astounding," the lawmaker said. He later resolved the problem and stopped the wage garnishment.

Now Correa is supporting a bill by state Sen. Mark Leno (D-San Francisco) to require debt collectors to document that they are pursuing the right person for the correct amount of money. The bill passed the Senate and is pending in the Assembly.

Michael Gottlieb, director of business development for Brachfeld, said the suit was served on the person who owed the debt, but the senator later was incorrectly targeted for wage garnishment. Once informed of the problem, Gottlieb said, Brachfeld stopped the process before any of Sen. Correa's wages were taken.

For many who do owe money, the debt collection process can be intimidating and nightmarish.

Katie Brown got a call in March about her unpaid $3,000 credit card bill from Hhgregg Inc. The person said he was from a free legal aid service she had contacted to try to stop harassing phone calls from debt collectors.

"After I told him everything, he laughed and said, 'Now let me tell you who I am. I hold your debt from Hhgregg,' " said Brown, 26, of Piqua, Ohio. She didn't know how the debt collector knew she had contacted legal aid.

"I was scared they would get to my husband's work and start calling them," she said, "because at this point they would stop at nothing if they were going to misrepresent themselves."

Brown did what an increasing number of consumers are doing: She filed a lawsuit. Her complaint against International Asset Group Inc. in Amherst, N.Y., alleged the company violated a federal law that prohibits misrepresentation and harassment by debt collectors. The suit is pending.

Brent Nowicki, the company's general counsel, said he couldn't comment about the case. International Asset Group is an upstanding company, he said, but sometimes technical violations of the law occur.

"It could be the rogue employee who gets a little overzealous about something," Nowicki said. "It happens. It's unfortunate."

In addition to lawsuits, consumers have been complaining to government officials. Last year, the Federal Trade Commission received more complaints about debt collectors — 180,928 — than about any other industry. The figure is up 73% from 2008.

"We've seen a high level of complaints, and I think some of it is collectors realizing in hard times they may have to press that much harder to get someone to pay," said Tom Pahl, the FTC's chief debt-collection lawyer. "And a lot of them are pressing."

About half the FTC's complaints concerning debt collectors are about harassing phone calls, including those that contain verbal abuse and come at odd hours of the day or night. Federal law prohibits harassment and limits the frequency and hours that debt collectors can call.

Industry leaders said they don't condone illegal behavior. But debt collectors have a difficult, though important job — recovering money owed to businesses, said Mark Schiffman, a spokesman for the Assn. of Credit and Collection Professionals, an industry trade group.

"The very real underlying factor here is nobody ever wants to get a call from a debt collector," he said. "It can cause people to have an emotional reaction."

The FTC has been cracking down after concluding in 2010 that the nation's debt collection industry was broken.

In January, Asset Acceptance, another large national debt buyer, agreed to pay $2.5 million to settle FTC allegations that it deceived people when trying to collect debts, including failing to disclose when debts were too old to be legally collected.

Meanwhile, the Consumer Financial Protection Bureau is considering new regulations for debt collectors.

Consumer advocates say most of the problems occur when the business that is owed the debt gives up on trying to collect it. Past-due accounts are sold for pennies on the dollar to debt-buying firms. Those companies, often with the help of law firms, then try to recoup as much of the unpaid bills as possible.

Encore and its subsidiaries, Midland Funding and Midland Credit Management Inc., have been among the top targets of government officials and consumer lawyers.

Encore's business has been booming. Collection cases increased 26% last year from 2010, and profit rose 24% to $61 million. Encore said most people ignore calls and letters about old debt, leading the company to pursue legal action.

Even so, the company has been slapped with lawsuits over its tactics. Last year, Encore agreed to pay as much as $5.7 million to settle an Ohio class-action suit in which Midland Funding was accused of using false affidavits in debt-collection lawsuits.

But 38 state attorneys general opposed the settlement, saying the payments, to be split among about 1.4 million people, were insufficient. The judge still approved the settlement, but that didn't end Encore's troubles.

In March, the West Virginia attorney general sued Midland, alleging the use of false affidavits and other violations of debt-collection laws.

Encore said it developed a consumer bill of rights last year that includes promises to stop trying to collect money from people who can demonstrate "permanent hardship" and to try to "avoid litigation whenever possible."

"We took concrete steps to improve our affidavit process soon after the issue was raised in 2008," Encore spokesman George Durham said. "Since the issue has been corrected now for years, we've moved on and remain focused on being a company that operates with integrity and treats consumers with respect."

The Brachfeld law practice files several thousand debt-collection lawsuits a month. Consumer lawyers said the firm often files suits with little documentation.

"They stand out to me as among the worst of the worst," said Aidan Butler, a Los Angeles consumer attorney.

In 2009, Butler won a $12,000 judgment from Brachfeld in Los Angeles County Superior Court for a consumer who had been sued by the firm to collect a $16,000 Capital One debt.

Butler had alleged that Brachfeld violated debt collection laws by, among other actions, making harassing phone calls and failing to validate the debt. Butler said he has defended about a dozen clients against suits filed by Brachfeld and each time the suit was dismissed.

In Alameda County, two consumers filed a class-action suit in 2010 against the Brachfeld firm and Encore subsidiaries, accusing them of illegally sending repayment letters and pursuing collection lawsuits without conducting reasonable investigations of the debt, with little involvement by lawyers and with the use of false affidavits. The suit is pending.

Gottlieb said he had no knowledge of the suit.

The law firm trains its collectors, monitors their calls and is careful to comply with the law, he said. Information about the debtor comes from the debt's owner and although addresses can be outdated, the firm does its own research as well.

"If someone comes in with an appropriate challenge and shows that our client gave us incorrect information, we will drop it," Gottlieb said. "But that's not the rule. That's the exception."

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